AT&T, Verizon dominate wireless… Is it time to regulate?

A new FCC report says that concentration in the mobile broadband/voice sector …

The government's latest annual report on the state of mobile wireless competition is out, and its conclusions are not what the wireless sector wanted to hear. Over the last half-decade, concentration in the industry has gone up—way up, in fact. The Federal Communications Commission says that the two dominant providers, AT&T and Verizon, now enjoy a 60 percent chunk of revenue and subscribers, "and continue to gain share."

Their nearest rivals, T-Mobile and Sprint, serve most of that remaining 40 percent. T-Mobile enjoyed some growth over the last two years. Sprint lost subscribers.

As a consequence, the antitrust measurement gauge that the FCC uses, the Herfindahl-Hirschman Index, has jumped by almost 700 points since the agency first began using it in 2003. That's a 32 percent increase. Some of this newer concentration is a consequence of mergers over the last few years: AT&T/Aloha, T-Mobile/Suncom, Verizon Wireless/Rural Cellular, and Verizon Wireless/Alltel.

So the wireless sector HHI is now at 2848, the agency says, which doesn't mean diddly until you know that the Department of Justice regards a market to be "highly concentrated" if, following a merger, the HHI in a given industry throttles past 1800. The FCC typically starts to eyeball the situation after a post-merger calculation of 2880.

Ask any American

We predicted that, urged on by reform groups and under new management, the FCC would produce a more critical analysis of the wireless industry than it has in the past. It wasn't a tough call, given that last year's report blandly proclaimed that there was "effective competition" in the market.

But sensing possibly hurt feelings, FCC Chair Julius Genachowski tried to make nice about the new 237-page survey's findings.

"This Report does not seek to reach an overly-simplistic yes-or-no conclusion about the overall level of competition in this complex and dynamic ecosystem, comprised of multiple markets," Genachowski gingerly declared in response to the data.

CTIA - The Wireless Association wasn't pleased; its lawyers obviously hit the ceiling when they got to the sentence noting that the report "provides data that can form the basis for inquiries into whether policy levers could produce superior outcomes."

CTIA believes the FCC "missed an opportunity today to truly highlight one of the few glowing examples of investment, innovation and consumer choice in the US economy."

"Ask any American," CTIA president Steve Largent continued. "Whether based on HHI, the raw number of competitors in each market, investment, handset and network innovation, price or consumer choice, the US wireless market is the envy of the world. That is why the lack of a finding is so troubling."

And furthermore: "We are very concerned... about the potential misuse of 'policy levers' that are referenced in the Report and believe that any attempt to add regulation to wireless as a result of this Report would be both misguided and harmful to consumers."

Bright lights

What kind of "policy levers" could we be talking about here? Setting aside the prospect of blunt antitrust lawsuits, the FCC has been running wireless-related inquiries for months about exclusive handset deals, the iPhone's refusal to carry Google Voice, jumbo-sized early termination fees, "bill shock," and the rates at which smaller telcos can buy network access to the big carriers.

The agency could use this report as the basis for moving these probes to the proposed rulemaking stage, something FCC Commissioner Michael Copps rather broadly hinted at in his response statement.

That 2848 HHI number "sticks out like a sore thumb," Copps warned, and flashes "a bright caution light for this Commission as we go about the business of advancing competition and consumer well-being in the Broadband Age. We are going to need an extra dose of vigilance going forward and use whatever policy levers we have available to ensure good outcomes for American consumers."

To which Copps' Republican colleague questioned whether it was ever the business of this survey, mandated by Congress since the 1990s, to get into the "policy lever" area. "This point in particular is outside the scope of our statutory mandate to produce the report, and appears to lay the foundation for more regulation," Robert M. McDowell noted.

And McDowell emphasized the document's more positive findings, among them that almost three-quarters of consumers can now pick from five or more mobile services. As for wireless broadband, the served percentage has gone from 51 to 76 percent, with almost 90 percent enjoying access to two mobile broadband carriers.

"These numbers illustrate that the vast majority of consumers have a meaningful opportunity to change providers if they cannot withstand a 'bill shock' or are unhappy with their mobile broadband experience," McDowell concluded.

"Meaningful," of course, depends on how affordable consumers find the $175 to $350 ETFs attached to various smartphone plans these days.

Extraordinarily high

Still, apropos of McDowell's point, the FCC's competition report—which is more detailed than past surveys—highlights a range of interesting and positive trends that go beyond the competition question. Among them:

Less talking: By the end of 2008, 90 percent of Americans owned a wireless device, and they used this gadget for 709 minutes a month, on average. But they talked less, "perhaps due to increased reliance on text and multimedia messaging," the FCC notes.

Text messaging is now "extraordinarily high," the report observes, with one study indicating that teenagers now send 3,146 text messages per month, equal to over ten messages for every hour they're aren't sleeping or in school (less per hour, of course if, as is typical with teens these days, they're busy texting away during class lectures).

Transition to a "data centric" market: AT&T says its network has sustained 18 times more mobile data traffic over the two-and-a-half years of its iPhone service. The data rate has jumped by a factor of four between June 2008 and June 2009. This is not surprising, since "the average iPhone user consumes twice the monthly bandwidth of the average smartphone user and five to seven times the monthly bandwidth of the average wireless voice subscriber," according to the FCC.

Lots more mobile gizmos: The big four providers unveiled almost 70 new smartphones between 2008 and 2009 over a variety of platforms (e.g., Apple iPhone, BlackBerry, Android, Palm, Windows Mobile). By December of 2009, consumers could choose from over 100,000 applications on the Apple Store and 15,000 via the Android Market. And they're choosing like crazy. The mobile and smartphone market is enjoying an upsurge in the first quarter of this year.

But this should come as little consolation to the over 900,000 rural residents whom the report says are still left out in the wireless cold, with no mobile service at all. Another 2.5 million get coverage from only one provider. Just 39 percent of rural consumers enjoy that aforementioned quintet of competitive wireless carriers in their region.

And not everybody in the wireless business thought the FCC's report was completely off base.

“While the wireless retail market remains competitive and has brought unimagined innovation and value to American consumers over the past decade," Sprint's Government Affairs Vice President Vonya B. McCann told us, the company "remains concerned that for competition to continue to flourish, changes must be made to the underlying regulatory structure which govern the USF system, switched access and special access."

Matthew Lasar / Matt writes for Ars Technica about media/technology history, intellectual property, the FCC, or the Internet in general. He teaches United States history and politics at the University of California at Santa Cruz.